The nature of the finance industry necessitates regulations to protect the interests of vulnerable consumers. Like other finance professionals, mortgage brokers must adhere to a strict set of regulations in order to maintain their licenses. Unfortunately, surety bonds are often viewed as vague, unnecessary prerequisites whenever mortgage brokers renew their licenses or establish new enterprises.
Differentiating between mortgage brokers and mortgage lendersMortgage broker bonds hold brokers financially accountable for obeying the terms and conditions of the state in which they work. Here it's important to note the distinction between mortgage lenders and mortgage brokers as to not confuse their responsibilities or liability. A mortgage lender is the establishment that supplies and services loans, and a mortgage broker is the professional who helps clients find a loans for the best rate. So in a sense, mortgage brokers sell the loans whereas mortgage lenders actually issue them.
When it comes to surety bonds in the mortgage industry, a surety provider's risk for issuing mortgage broker bonds versus mortgage lender bonds is pretty similar. However, the recent lending crisis caused government agencies to set higher stakes for lenders. Although some states still use the same bond amount and application form and for both brokers and lenders, most now require a separate, and larger bond, for lenders.
Most states now have laws that require mortgage brokers to secure a surety bond before getting a license to operate legally. The state's insurance bureau or department of finance typically regulates the state's mortgage broker industry. These regulations have been established to help protect consumers in the event of fraud or other wrongful practices that a broker could commit.
As with other professions, surety bonds within the mortgage industry function as contracts between three parties to help ensure performance:
If a mortgage broker commits fraud or makes other unethical decisions when working with a client, the harmed party or government agency can make a claim on the bond, requiring the broker to pay penalties. If, for some reason, the broker cannot provide the necessary compensation, then the surety will be held responsible for doing so for an amount not to exceed the bond's penal sum. Due to the nature of bonds, surety providers usually don't expect to pay for a broker's mistakes. For this reason surety providers try to avoid working with risky brokers, so they conduct thorough financial background checks of those who apply for mortgage broker bonds.
The Secure and Fair Enforcement for Mortgage Licensing Act, or the S.A.F.E. Act, was enacted in 2008 to strengthen regulations for mortgage brokers nationwide. When states implemented the laws within their own mortgage industries, many increased the necessary bond amount needed for brokers. For example, Oregon raised the required broker bond amount from $25,000 plus $10,000 per branch to a minimum of $50,000. Ohio, too, increased its broker bond amounts markedly and now requires $50,000 for main offices plus $10,000 per branch, which could add up to $150,000 for companies and $100,000 for individuals.
Once the necessary bond amount has been determined, the surety provider will calculate an issuance fee to charge the broker to cover processing costs. The fee will typically cost the broker 1 to 3 percent of the bond amount. A broker with poor credit should expect to pay significantly more, however, as the surety takes a greater risk in backing the work of a potentially unstable broker.
It's always important to check local regulations regarding mortgage brokers before purchasing a bond. Mortgage brokers who have questions about their bonds should check with the obligee requiring the bond or contact an experienced surety provider.